To get a spot by the inviting turquoise pool at the Hotel Serendib, you have to arrive early these days.

In years gone by, grabbing a sun-lounger was not exactly a problem - there were hardly any tourists here - but the hotel, one of many along the balmy western coast of Sri Lanka, has recently enjoyed something of a renaissance.

Yesterday, the scaffolding was coming down following an extravagant poolside disco, complete with fake snow-painted pine trees and party balloons drifting among the palms.

After more than two decades of war and mayhem, Sri Lanka is finally beginning to enjoy the dividends of peace. Late last year, the Tamil Tigers - who had been waging a savage guerrilla battle in the north and east of the island - dropped their demands for a separate state.

It was an historic concession. Three rounds of peace talks between the Tigers and the Sri Lankan government have gone well, with a fourth currently under way in Thailand.

Recently, both sides have been discussing how to resettle thousands of Tamil refugees displaced by the fighting. Ordinary Sri Lankans, initially sceptical about the Tigers' Christmas Eve 2001 ceasefire, are now coming to the conclusion that the country's appalling ethnic conflict is finally over.

"There is a new mood of confidence among the people. This is the first time we have been able to go out onto the streets over Christmas and celebrate openly," Chari Witanacchi, the Serendib's general manager, pointed out.

"Sri Lanka should be one of the world's top holiday destinations - after all, it's beautiful here."

Tourists - many of them British - have started to return, attracted by the tropical climate, Buddhist temples and seemingly endless beaches.

In Bentota, one of the main beach resorts, western holidaymakers are busy relaxing. A few plodded up and down the warm sands on the back of a small, rather stoical, female elephant. while others explored the turtle hatcheries and rambling colonial forts further down the coast - but the vast majority loafed by the pool under an unwavering sun.

"This is a great place. We booked this year through a travel agent, but next time we'll come back on our own," one British tourist said.

Nevertheless, Sri Lanka's future, both as a country and a holiday destination, remains uncertain. The Tigers may have dropped their demand for an independent Tamil state, but they are likely to insist on a new federal arrangement allowing them to hang on to the areas they already control - the Wanni, their northern jungle heartland, and a small enclave around the eastern town of Batticaloa.

In addition, it is unclear what role the Tigers' reclusive military leader, Vellupillai Pirabakaran, will play in any new political administration.

His suicide bombers have blown up several Sri Lankan heads of state, as well as generals, ministers, and India's former primer minister Rajiv Gandhi. Most Sri Lankan Tamils regard him as a demigod, but in India - and elsewhere - he is a wanted international terrorist.

The transition to democratic politics could prove tricky. Sri Lanka's new prime minister, Ranil Wickremesinghe, has widespread popular support for his year-old peace process, but he is increasingly at odds with embittered president Chandrika Kumaratunga, whom he toppled from power in 2001.

Potential tourists, meanwhile, face rather more mundane problems. Shortly before the Tigers announced their ceasefire, one of their suicide squads staged an extraordinary raid on Colombo airport, blowing up almost half of Sri Lankan Airlines' fleet. The planes have not been replaced, and getting a ticket to Sri Lanka is difficult.

"There are only three flights a week from Europe to Sri Lanka - and it's a long way," Mr Witanachchi complained.

Nevertheless, Sri Lanka tourist board chairman Paddy Withana said earlier this week that he expected 500,000 visitors this year, compared to only 180,000 European tourists in 2002, most of those from Germanny and Britain. When the Observer named Sri Lanka as one of the top tourist destinations of 2003 last month, it was front page news.

There seem to be plenty of grounds for optimism. Later this month, the picturesque ferry route between Rameswaram, in southern India, and Sri Lanka will resume for the first time in almost 20 years. The service was suspended after ethnic conflict between the island's minority Tamils and the majority Sinhalese community exploded into civil war.

Now, after assassination, turmoil and destruction, the mood is upbeat. "That the ceasefire is still holding is something of a surprise to Sri Lankans, who have grown used to cycles of ceasefires and the abrogation of ceasefires over the years," the island's newspaper pointed out in its New Year editorial.

Sri Lanka's government is now hoping that the absence of war, together with the climate and crystal-clear lagoons, will persuade people to visit.

After all, such attractions famously persuaded the science fiction writer Arthur C Clarke to indefinitely extend a diving holiday to Sri Lanka in the late 1950s. He is still there.